Question 16 A project that provides annual cash flows of $28,500 for nine years

Question

Question 16

A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. If the required return is 8 percent, the NPV for the project is $ and you would the project. If the required return is 20 percent, the NPV is $ and you would the project. At a discount rate of percent, you would be indifferent between accepting the project and rejecting it. (Do not include the dollar & percent signs ($ & %). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Situation one, when Required return is 8%:

Cumulative Present value factor for nine year=6.246

Cash inflow for each year=28,500

Discounted cash flow today=28,500*6.246=178,011

Cash outflow =138,000

Net Present Value = 40,011

Sitution two when required rate of return is 20%

Annual Cash inflow=28,500

Cumulative discount factor=4.031

Discounted inflow=28500*4.031=114,883

Cost =138,000

Net Present Value (-)23,117

IRR is the rate at which we will indifferent in the current situation.

IRR=L+(H-R)*A/(A-B)

=8+(20-8) *40,011/40,011+23117

=15.61%

Discount rate 15.61% at which we are indifferent situation.

L=Lower discount rate

H=Higher discount rate

A=NPV at Lower discount rate

B=NPV at Higher discount rate.

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